Stocks Extend Declines after Snapback Rally

By Tim Paradis | October 1, 2008 | 11:46 AM EDT
New York (AP) - Financial markets showed further signs of dejection Wednesday, with stocks extending this week's gyrations as investors prepared for a possible Senate vote on the government's proposed $700 billion financial sector bailout. The Dow Jones industrials at times lost more than 200 points in their third triple-digit move this week, while credit markets remained extremely tight.
Stocks also fell on disappointing economic news. In its report on the manufacturing sector in September, the Institute for Supply Management revealed a troubling drop in new orders. The group's overall index of manufacturing activity fell to 43.5 in September from 49.9 in August. Wall Street had expected a reading of 49.5, according to economists polled by Thomson/IFR.
"We're now seeing in those numbers that we're getting a contraction in economic activity," said Jim Dunigan, managing executive of investments at PNC Wealth Management.
At this point in the credit crisis, weak economic numbers are coming as no surprise to Wall Street - but September's numbers are expected to be particularly bleak because of the seizing up of the credit markets that occurred during the month. The reports are further reminders of how much pain is being felt in the economy, and the data are likely to motivate more investors to pull money out of stocks.
"We've taken the credit markets for granted much like you do the electricity coming on every day but in this particular case the power grid is down," said Dunigan. "If we don't have a functioning credit market banks aren't lending to each other - credit is dried up. That ultimately affects economic activity."
Nervousness about debt has made banks hesitant to extend loans; banks have preferred to hold onto their cash. But some analysts and policymakers are worried that drop in lending will curtail economic growth. And the fear paralyzing the credit markets is making it more difficult and expensive for some companies to fund their day-to-day operations, putting basics like payroll at risk.
The London Interbank Offered Rate, or Libor, on overnight dollar loans dropped to 3.79 percent on Wednesday from Tuesday's record 6.88 percent. Libor measures how much banks are charging one another to borrow. Many consumer lending rates, including about half of all U.S. adjustable-rate mortgages, are tied to Libor.
But overnight Libor remains well above the target Fed funds rate of 2 percent, showing that banks are still tending to hoard their cash than lend it.
Demand for the safety of government debt increased Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.68 percent from 3.83 percent late Tuesday. The yield on the 3-month T-bill, the safest type of investment, fell to 0.78 percent from 0.88 percent late Tuesday. The decline in yields indicates that investors are willing to accept even modest returns to protect their money.
Investors are hoping Washington can inject a shot of confidence into the credit markets. The bailout plan appears headed for a Senate vote Wednesday night. Leaders there have added tax breaks for businesses and the middle class and increasing deposit insurance to make it more palatable to the House, which rejected the plan Monday.
Financial markets likely will remain nervous until the voting on Capitol Hill is complete. In late morning trading, the Dow fell 142.17, or 1.31 percent, to 10,708.49. The Dow fell 778 points Monday, its steepest drop in years, after lawmakers rejected the bailout plan, then rallied 485 points Tuesday on hopes party leaders would find the votes to pass the measure.
Broader stock indicators also dropped Wednesday. The Standard & Poor's 500 index fell 16.99, or 1.46 percent, to 1,147.75, and the Nasdaq composite index fell 36.58, or 1.76 percent, to 2,055.30.
Light, sweet crude fell $3.90 to $96.74 a barrel on the New York Mercantile Exchange after the government reported a surprise increase in U.S. crude supplies.
Investors are hoping the government can help fix the stopped-up credit markets. Champions of the plan say it is necessary to absorb the soured mortgage and other bad debt from banks' books as a way to restore faith in the credit markets, while detractors said the plan was too costly and risky.
"It will help to restore confidence and confidence is the No. 1 issue now," said Charles Widger, chief executive of Brinker Capital."
He said while stocks could rally if Congress extends relief to the financial sector investors are also facing heightened concerns about the economy.
"You've got to believe that after this major disruption in the financing of the economy - the absence of cash for working capital - that it's going to slow economic activity and that therefore we're going to be in a recessionary environment," he said.
Not all economic news arriving Wednesday was downcast, however. The Commerce Department reported that construction activity remained unchanged in August even though spending for residential projects saw its first increase in 17 months, a welcome upturn amid the housing downturn. Wall Street had expected construction activity to decline 0.5 percent.
The dollar was mixed against other major currencies, while gold prices rose.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 385.1 million shares.
The Russell 2000 index of smaller companies fell 12.14, or 1.79 percent, to 667.44.
Overseas, Japan's Nikkei stock average rose 0.96 percent. In afternoon trading, Britain's FTSE 100 rose 0.53 percent, Germany's DAX index fell 1.04 percent, and France's CAC-40 fell 0.41 percent.
Financial markets showed further signs of dejection Wednesday, with stocks extending this week's gyrations as investors prepared for a possible Senate vote on the government's proposed $700 billion financial sector bailout.